Getting a mortgage as a self-employed worker can be challenging. Unlike salaries employees, self-employed individuals typically don’t qualify for traditional mortgage loans. As a result, they often need to explore financial products specifically designed for entrepreneurs.
While it may be more difficult, qualifying for a mortgage as a self-employed worker is definitely possible! If you’re a business owner, the best way to find a loan tailored to your needs is to consult with a mortgage broker. This expert can help you navigate the various options available to you.
In the meantime, here is some important information you should know about it.
What is a self-employed mortgage loan?
You might be wondering how a self-employed mortgage loan differs from a traditional mortgage. The key difference is that a self-employed mortgage loan is specifically designed to meet the unique needs of self-employed workers, as most of them don’t qualify for traditional loans in the same way salaried employees do.
The main distinction between these two types of financing lies in the eligibility requirements. Self-employed individuals often have more difficulty providing proof of stable income, which is typically required by banks to approve a loan. Since self-employed workers usually have irregular income, this presents a challenge.
To accommodate this, self-employed loans offer more flexibility in terms of income declaration. Borrowers may, for example, be allowed to self-declare their finances instead of providing traditional income documentation.
In most cases, however, borrowers will need to pay for mortgage insurance to offset the lender’s risk.
How to qualify for a mortgage as a self-employed borrower?
As a self-employed worker, there are several factors that may complicate your loan application. However, qualifying for a mortgage is still possible if you meet the necessary eligibility criteria and compare offers from different lenders. Many large Canadian banks and smaller financial institutions offer programs specifically for self-employed workers. Alternatively, you can also consider private or alternative lenders, though be aware that their interest rates and repayment terms may be riskier.
Eligibility requirements
Most financial institutions require that you have been in the same position or have operated your business for a least two years. This gives them a reliable record of your finances, helping them assess whether you manage them responsibly. The lender will typically average your income from the past two years to determine the loan amount you qualify for.
It’s also important to note that, just like traditional mortgages, factors such as a strong income, an excellent credit history, and a significant down payment will improve your chances of getting your application approved. These factors will also help you secure more favourable loan terms.
Proof of income and other documents
Whether your company is registered or incorporated, you will need to provide certain documents to prove your eligibility for a mortgage loan. These typically include:
- Federal and provincial tax notices
- Tax reports from the past few years.
Depending on your specific situation and the lender you approach, you may also need to provide additional documents, such as:
- Financial statements for your business.
- Proof of ownership of the business.
- Contracts showing your previous income and expected income for the coming years.
- Proof of payment for GST and/or HST.
- Proof of payment for any taxes owed.
- Documentation showing the source of the down payment.
- Personal and business credit scores.
Mortgage insurance for self-employed workers
Mortgage insurance is designed to meet the needs of self-employed workers, just as mortgages are. This is particularly important since borrowers who make a down payment of less than 20% of the property’s purchase price are required to have mortgage insurance. Here are a couple of options:
1. The CMHC Self-Employed insurance
The Canada Mortgage and Housing Corporation (CMHC), a leading provider of mortgage insurance, offers a specific program for self-employed workers called CMHC Self-Employed. Self-employed individuals who can verify their income are eligible for mortgage insurance on properties of 1 to 4 units under the same terms and conditions as salaried employees.
To qualify, the borrower must:
- Be a Canadian citizen, permanent resident, or a non-permanent resident authorized to work in Canada.
- Have been in business for at least 24 months.
If the borrower has been self-employed for less than 2 years, they may still be eligible based on additional factors, such as:
- Acquisition of an established business.
- Sufficient liquidity.
- Predictable income.
- Relevant education and training.
- Credit history.
The maximum loan-to-value ratio for an owner-occupied property is 95% for a property of 1 or 2 units, requiring a 5% down payment. For a property of 3 to 4 units, the ratio is 90%. If the property is not owner-occupied, the maximum ratio is 80%.
To qualify for this mortgage insurance, the loan must also have a maximum amortization period of 25 years.
2. The Self-Employed Workers Program from Sagen
If you believe that your reported income in recent years does not accurately reflect your actual earnings, Segan offers a valuable program to consider.
Business for Self, commonly known as Alt-A, allows self-employed workers to self-declare their income, provided it is reasonable and verifiable.
Unlike the SCHL program, this option requires a minimum down payment of 10%, with a maximum loan-to-value ratio of 90%. Other eligibility requirements include:
- The borrower, whether a sole proprietorship, partnership, or corporation, must demonstrate two years of responsible financial and credit management.
- The declared income must be reasonable, considering the industry, length of business operations, and business type.
- The property must have a maximum of two units, with one unit being owner-occupied.
- The borrower must have no history of mortgage payment defaults in the past seven years and no prior bankruptcies.
- The amortization period must not exceed 25 years.
- The maximum loan amount is $750,000 for metropolitan areas such as Toronto, Calgary, and Vancouver, and $600,000 for the rest of Canada.
It is important to note that borrowers with commission-based income are not eligible for this program, and mortgage insurance fees are higher compared to other programs.
3. Canada Guaranty’s Low Doc Advantages
Similar to the other institutions, Canada Guaranty offers a mortgage insurance program for self-employed workers called the Low Doc Advantage.
To be eligible, the borrower must provide a minimum down payment of 10%, with at least half of this coming from their own savings. The borrower must also qualify based on the higher of the following interest rates: the contract rate plus 2% or 5,25%.
For more information on mortgage financing options for self-employed workers, it’s advisable to contact a mortgage broker. A broker can help you explore the best solutions tailored to your specific situation.
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